Computing the Endogenous Mortgage Rate without Iterations

A number of mortgage prepayment models require a specification of the mortgage rate process. Usually some ad-hoc models are used (e.g., a Treasury yield plus some constant). Recently, a number of papers appeared where authors utilized a mortgage rate implied by the current yield curve (so called endogenous mortgage rate). However, the existing computational algorithms suffer from the curse of dimensionality and, consequently, are problematic to use for full scale problems. A computational… CONTINUE READING